Tuesday, May 31, 2011

When a respected magazine's cover story cited a statistic, I used to assume the number had at least some connection to reality. Not any more -- not after reading Bloomberg Businessweek's recent piece on the U.S. Postal Service.

Here's the stat that really stumped me: "In the last quarter of 2010, junk revenue climbed 7.1 percent," with the added statement, "Unfortunately for the USPS, junk volume has since plateaued."

Nowhere does the article define "junk mail", though it uses the phrase liberally. It's certainly a term you won't find in any USPS reports.

"Junk mail" is a bit like "pornography": It's hard to define, but you know it when you see it. I think most people would agree that it's mail that is both unwanted and irrelevant to you -- something that goes directly into the recycling bin or garbage can.

Businessweek's definition of "junk mail", however, is apparently Standard-class mail -- all Standard-class mail. Standard's revenue in the last quarter of calendar year 2010 increased by the magic 7.1%, which was true of no other class or subclass of mail. It grew only 0.9% in the 1st Quarter of this year.

According to the magazine's unstated definition, your favorite catalog is junk mail. That Red Cross plea to help the folks in Joplin, MO? Junk. The reminder notice about your class reunion, the annual reports for your mutual funds, and that parcel with the item you ordered on the Web? All junk. A subscription solicitation for a certain weekly business-news magazine? Yep, Junk City, baby.

Here's another head-scratcher in the article: "The USPS has historically placed the interests of its unions first." That's news to those who have followed the Postal Service's at-times acrimonious relations with its unions. Yes, postal executives must try to appease the unions, but only because Congress has put the unions in such a strong bargaining position.

The article goes on to suggest that the recent labor contract with the APWU is just another union giveaway. But even APWU members who grumble about the contract's "eating your young" provisions have written to me acknowledging it was a brilliant, money-saving deal for the Postal Service.

One more complaint: I had to flip past a lot of junk pages for companies like Verizon, JPMorgan Chase, and Siemens to get to the article. Oops, I forgot: Businessweek doesn't call those "junk pages"; it calls them "advertising".

Tuesday, May 24, 2011

Mailers may be facing an unexpected, emergency increase in most postal rates later this year because of an appeals court decision that was issued today. (May 25 update: A knowledgeable person states that the ruling will not result in a rate increase, just some new guidelines from the PRC. Stay tuned.)

The U.S. District Court of Appeals for the District of Columbia sided mostly with the U.S. Postal Service in its appeal of a Postal Regulatory Commission decision last year denying "exigent" rate increases of more than 5%. The court sent the case back to the PRC for reconsideration.

The PRC erred, the court said, in requiring that "the proposed rate adjustments be tailored to offset the specific effects of the claimed exigency," which in this case was the economic recession that helped cause the Postal Service's financial crisis. Rates for most classes of mail -- including First Class, Standard, and Periodicals -- can increase no faster than the rate of inflation except in the case of "exceptional or extraordinary circumstances."

"A financial crisis can often result from multiple contributing factors, of which only one may be 'extraordinary or exceptional,' but that would still justify an exigent rate increase,” the court said.

The decision seems to present at least three challenges for the PRC:

1) The court said the PRC should "exercise its discretion" in interpreting an ambiguous law and determine "how closely the amount of the [rate] adjustments must match the amount of the revenue lost as a result of the exigent circumstances." But the ruling offers no guide as to how much discretion the PRC must exercise, other than saying the PRC was too strict with the Postal Service in its Sept. 30 ruling. In other words: "Exercise discretion, but not too much discretion."

2) The PRC must decide how much of a rate increase is justified by the recession even though the Postal Service presented sketchy data on the amount of money it lost because of the economy -- and how much was from such other causes as the increasing use of e-mail.

3) In the 10 months since the Postal Service asked for exigent rate increases, an inflation-based set of rate hikes was proposed and implemented. The PRC must apparently decide whether to recalculate -- or to have USPS recalculate -- the requested exigency-based rates in light of those non-exigent increases.

Monday, May 23, 2011

If you think timber operations and paper mills cause deforestation, consider this finding from a new U.S. Forest Service study of Southern forests: “Strong timber markets encourage retaining forests rather than converting them to other land uses.”

“Strong timber markets have encouraged forest landowners to keep their forests and forest cover rather than convert them to other uses. Our forecast suggests that the strongest timber markets lead to the least forest losses,” David Wear, a Forest Service economist, said last week at a press conference announcing the findings of the Southern Forest Futures Project. Wear co-led the team of 40 scientists and analysts that produced the report.

“The South’s timber harvesting expanded faster than the Nation’s from the 1950s to 1990s” because of "a technology-driven shift toward outdoor use of treated southern pine lumber,” growth in paper manufacturing, and restrictions on harvesting from public lands in the West, the report says.

The states of the former Confederacy produce 60% of the nation’s timber harvest, according to the report. If the South were considered a separate country (as a few old fellas still insist), it would be the largest timber producer in the world.

“From the 1960s to the 1990s, the period in which timber harvesting more than doubled, the biomass in southern forests also grew steadily, reflecting high growth rates,” according to the report. The increase in biomass has slowed in recent years as timber harvesting declined slightly.

“Under most futures [scenarios] considered, the carbon fixed in the South’s forests and their soils reaches a maximum between 2020 and 2030 and then declines through 2060. Futures with stronger timber markets yield somewhat more carbon but fail to completely offset the carbon losses dominated by land use changes.”

Those “land-use changes” mostly have to do with the effects of spreading urbanization. Home building causes deforestation not so much from the trees cut to make 2-by-4s as from the trees cleared to make way for new developments.

“Our results indicate that urbanization affects forest area but can be offset by market futures that place higher values on forest uses. This logic extends to any other source of forest values, including payments for nontimber forest products and crucial ecosystem services. Often cited examples are watershed protection, sequestration of atmospheric carbon, and habitat protection.”

There’s also a downside to strong timber markets: “Forest landowners have shown a strong propensity to convert naturally regenerated forests to planted pines after harvesting, especially in the Coastal Plain, an investment response that is strongly linked to the condition of forest product markets.”

Often referred to as tree plantations, land dedicated to planted pines constitutes 19% of Southern forests, a number that will rise to 24% to 36% by 2060, the report predicts. Wood-based bio-energy is more likely to cause the kind of demand leading to additional planted pine than are traditional timber and paper production, it adds.

Sunday, May 15, 2011

In an error-filled editorial, The Wall Street Journal chided the U.S. Postal Service Saturday for not acting more like a business and for being too slow to cut costs. Be careful what you wish for.

"If this were a private business, the obvious response to these losses would be urgent cost-cutting to avoid insolvency," the editorial said in response to USPS's latest quarterly numbers. Good point. Let's start with cutting the Postal Service's subsidization of the Journal.

Within the Postal Service, the Journal is famous for complaining vociferously if any of its newspapers are delivered a day late, even if the Journal misses the deadline for getting the papers to a postal facility. Postal managers generally acquiesce, creating special (and labor-intensive) procedures to expedite handling of the Journal.

"Wall Street Journal gives the USPS all of the addresses that they can’t service with alternate delivery and then expects to receive next-day delivery regardless of the arrival time. I’ve witnessed this first hand at USPS facilities," says an executive for a major Postal Service customer.

Such unofficial "Hot 2C" or "Hot Periodicals" expedited mail-processing programs are a major reason that so much Periodicals mail is sorted manually rather than on machines, according to a recent USPS Office of Inspector General report.

Over the years, magazine-industry representatives have been nearly unanimous in pleading with the Postal Service to stop such manual processing of Periodicals mail. The added cost helps make the entire Periodicals class unprofitable for the Postal Service, creating pressure on USPS to jack up postage rates for all publishers.

“Periodicals publishers have repeatedly made clear that they do not desire and are not willing to pay for 'hot' processing," Jim O'Brien of Time Inc. wrote in response to the OIG report. But people inside the Postal Service said they would catch hell if they stopped hot processing of the Journal and certain other publications.

If the Postal Service were a private business, it would charge customers for such special handling. If the Postal Service were a private business, it would realize how much money it is losing on such customers. If the Postal Service were a private business, it would conclude that losing such customers would be better than continuing to subsidize them.

(Side note: Critics of five-day delivery have noted that if daily newspapers had to find another means of delivering their Saturday editions, they would probably use that network for other days of the week as well. Is it possible that postal executives are viewing that as a benefit of ending Saturday delivery rather than as part of the down side?)

The Journal editorial was written by someone who hadn't bothered to do much research -- or who purposely misrepresented the Postal Service's situation. It mentions the small pay raises for current employees in the recently ratified contract with the largest postal union, but not the huge savings USPS will get in return -- such as "eat your young" pay rates for new hires and the increased use of part-time employees.

It also calls ending the prefunding (really, overfunding) of postal retiree health benefits "a taxpayer bailout" when no tax money would be involved. And it completely garbles the issue of the Postal Service being overcharged for its share of pension payments to employees who used to work for USPS' government-run predecessor.

If the Postal Service were a private business, it would not be subsidizing The Wall Street Journal.

Tuesday, May 10, 2011

The watchdogs that keep an eye on the U.S. Postal Service have taken on an unusual role – dreaming up new products and other innovations for the Postal Service.

The trend is highlighted by the USPS Office of Inspector General’s release yesterday of a request for proposals to determine how the Postal Service can innovate. The selected consulting company would “benchmark the Postal Service against ten successful companies” to identify best practices and processes in “innovation management” that can be adopted by USPS.

“Innovation is the development of new products, services and processes,” says yesterday’s RFP. But why then are so many of the proposals for new postal products and services coming from outside the Postal Service?

Some critics claim that the Postal Service is too bureaucratic to innovate, but that’s not completely fair. “If it fits, it ships” has been not only a clever slogan; it represents new thinking about simplifying postage for customers. And the Flats Sequencing System would be a significant innovation if it turns out to be successful. (The jury is still out on that one.)

Hindering innovation has probably been the “bunker mentality” adopted by postal management the past few years as declining mail volume and Congressional budget games lead USPS from one financial crisis to another.

Out of necessity, its energies have been focused on downsizing and cost cutting. Has any major government agency ever reduced costs as rapidly as the Postal Service has in the past few years?

The Postal Service's size and complexity are also barriers to innovation. Even in the management ranks, USPS is made up mostly of specialists who lack the broad understanding of processes and customers necessary to implement meaningful change (or, in many cases, to write proposed regulations that would work in the real world). And insiders talk about “brain drain” – the loss to early retirement of some of the most knowledgeable people.

Then there’s the Bernstock Affair. Robert F. Bernstock was the head of mailing and shipping services who was brought in from the private sector to revolutionize the Postal Service’s marketing efforts.

But mostly what he became known for during his brief and checkered stint with USPS was awarding no-bid contracts to his buddies and using USPS staff to conduct personal business. After the firestorm of criticism that accompanied Bernstock’s departure, it was only natural for postal executives to focus on efficiency while leaving to others the generation of wild ideas and the floating of trial balloons.

Sunday, May 8, 2011

The Postmaster General didn’t just tell major customers this week that the U.S. Postal Service is a business and not a government agency. He followed up with a move right out of the corporate playbook – announcing plans to stiff a major creditor.

Pat Donahoe’s revelations at the National Postal Forum about what the Postal Service planned to do, such as simplified rules and a new ad campaign -- got most of the media attention. But at least as significant was what he said about what the Postal Service will not do.

It will no longer see itself as “the face of the federal government in every community.” It won’t offer banking services. It won’t sell cell phones. And it might not make a controversial payment to the federal government that is due Sept. 30.

“We are evolving as an organization from one that is mostly oriented toward public service, to one that is mostly oriented toward competing for customers,” Donahoe said in a speech at the postal forum. “The heart of what we do, ultimately, is delivering. This concept – that the core function of the Postal Service is delivering – is powerful.”

A cynic’s translation: “If you want us to keep an unprofitable post office from closing just because it’s the only gathering spot in the community, try getting FedEx to open a facility in that town. If you’re concerned about the jobs an area will lose as we make efficiency moves, ask UPS to hire some extra employees in that region.”

“In the past couple of years, there have been calls for the Postal Service to get into banking or selling cellular phones as a way of raising revenue,” Donahoe said, without mentioning the USPS Office of Inspector General. “To be honest, those ideas never made any sense to me. Our focus has to be on perfecting our core function of delivering. This notion will guide us as a business. It will be a filter for the way we approach the marketplace and the way we support the industry.”

That may indicate Donahoe takes a dim view of some other non-distribution revenue ideas that have surfaced in recent years – such as providing electronic mailboxes, acting as a go-between for online payments, and mounting mobile sensors on delivery trucks.

Acting like a private company only goes so far. The Postal Service is on track to be insolvent on Sept. 30, when by law it must give the federal government about $5.5 billion for what is euphemistically referred to as a prepayment of retiree health benefits. Unlike a private company facing similar circumstances, it can’t file for Chapter 11 bankruptcy protection.

Then again, if it were a real business, USPS wouldn’t have to fork over the money. Its retiree health fund is already quite healthy; the payment is merely an accounting gimmick that Congress uses to make the federal deficit look smaller. (See Congress Hears the Truth About Postal Service Finances for more information.) Using common business rules for accounting, the "prepayment" (actually, it's an overpayment) would probably be considered an asset rather than an expense.

Also unlike a private business, the Postal Service doesn’t have to worry about its creditors forcing it into bankruptcy or foreclosing on its properties. That leaves it with another option at the end of the fiscal year when the feds come asking for money the Postal Service doesn’t have and can’t borrow. Call it the Nancy Reagan Plan: “Just say no.”

Though it has a few months to decide on that course of action, Donahoe sounded like a man who had already made up his mind when he appeared at a postal forum news conference, wrote Larry Riggs of Multichannel Merchant.

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